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FDIC Conductor Wields a Steady Hand
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Then, in 2006, she was called back to Washington.
At the time, the FDIC was seen by observers as a Maytag agency. It had been two years since the last bank failure, the longest quiet stretch since the agency was created in 1933. Hundreds of FDIC employees had been laid off. Many banks were no longer required to pay insurance premiums because the money wasn't needed.
Bair, however, soon decided that the sleepy days were ending. Old friends told her that aggressive lending practices were no longer a danger only to consumers but also to the industry. At Bair's direction, regulators bought a database of information about securitized loans. They saw an alarming pattern of disregard for traditional underwriting.
By the spring of 2007, Bair was arguing with increasing vigor, first in private meetings and then in public speeches, that the industry needed to modify loans on a massive scale -- not only to help customers avoid foreclosure but also to help companies avoid the consequences of those foreclosures.
She remains frustrated that such a program is absent from the government's response to the crisis.
"I think that's been a frustration of mine throughout this," Bair said. "The thrust has still been on the back end, of providing assistance to institutions, and not on fixing the loans themselves. And for whatever reason, the borrowers have been viewed as politically unpopular, which has made it difficult to get the political will to fix the mortgages. And that's the core of the problem. That's what needs to be fixed."
As foreclosures continued to rise, financial institutions started to crumble. Investment banks fell first because they were more highly leveraged, but the crisis soon spread to commercial banks, which are insured by the FDIC.
Even many of Bair's critics applaud her recent performance. In the past week, the FDIC has overseen the rescue sales of Washington Mutual to J.P. Morgan Chase and Wachovia to Citigroup. The two deals, involving banks with more than $1 trillion in assets, could cost the government nothing.
To seal the Wachovia deal, the FDIC agreed to absorb any losses above $42 billion on a portfolio of Wachovia's most troubled loans in exchange for a $12 billion stake in Citigroup. Experts say that combination of shared risk and shared reward offers a model for dealing with other troubled banks.
But Bair was no more able than other regulators to predict that things would get this bad.
After the failure of IndyMac, Bair told Reuters that she would be "very surprised" to see another large bank fail. "Based on what I'm seeing now, I really don't see we will have institutions of that significant size having serious problems," she said.
Almost exactly two months later, the FDIC would take possession of Washington Mutual in the largest bank failure in U.S. history.
